Norcros — In-line update highlights undervalued entity

Norcros (LSE: NXR)

Last close As at 02/12/2024

236.00

2.00 (0.85%)

Market capitalisation

212m

More on this equity

Research: Industrials

Norcros — In-line update highlights undervalued entity

Norcros’s FY23 trading update highlighted a solid performance, particularly in the UK in H2, as well as the closure of the loss-making Norcros Adhesives division. We believe that Norcros’s proven strategy remains on track, which should allow it to unlock significant market share gain and M&A opportunities given its robust balance sheet. We also believe that its key strengths are undervalued and that most, if not all, of the legacy issues, particularly relating to the pension, have been resolved. We maintain our estimates and our 252p/share valuation implying c 40% upside.

Andy Murphy

Written by

Andy Murphy

Director, Financials & Industrials

Industrials

Norcros

In-line update highlights undervalued entity

FY23 trading update

Construction and materials

14 April 2023

Price

177p

Market cap

£158m

ZAR22.80/£

Net debt (£m) at 31 March 2023

c 50.0

Shares in issue

89.3m

Free float

98%

Code

NXR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.3)

(14.5)

(26.6)

Rel (local)

(7.8)

(14.2)

(27.2)

52-week high/low

263p

165p

Business description

Norcros is a leading supplier of showers, enclosures and trays, tiles, taps and related fittings and accessories for bathrooms, kitchens, washrooms and other commercial environments. It has operations in the UK and South Africa, with some export activity from both countries.

Next events

FY23 preliminary results

15 June 2023

Analyst

Andy Murphy

+44 (0)20 3077 5700

Norcros is a research client of Edison Investment Research Limited

Norcros’s FY23 trading update highlighted a solid performance, particularly in the UK in H2, as well as the closure of the loss-making Norcros Adhesives division. We believe that Norcros’s proven strategy remains on track, which should allow it to unlock significant market share gain and M&A opportunities given its robust balance sheet. We also believe that its key strengths are undervalued and that most, if not all, of the legacy issues, particularly relating to the pension, have been resolved. We maintain our estimates and our 252p/share valuation implying c 40% upside.

Year

end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

324.2

27.4

29.7

8.2

6.0

4.6

12/22

396.3

38.6

38.7

10.0

4.6

5.6

12/23e

448.9

41.8

37.5

10.0

4.7

5.6

12/24e

462.6

38.9

33.7

9.3

5.3

5.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY23 trading robust and in line with consensus

Norcros traded well in FY23 considering the challenging macroeconomic conditions and is likely to report revenue of c £440m, up 11.3% on a reported basis, and up 1.3% on a constant currency and like-for-like (l-f-l) basis. The principal difference between the two growth rates was the inclusion of Grant Westfield from the end of May 2022. Underlying operating profit is expected to increase 10% to be in line with consensus, which is £45.9m. Net debt is expected to be c £50m (FY22: net cash of £8.6m), again, in line with market expectations following the M&A.

UK H2 recovery, RSA weaker.

The UK business was resilient in tough markets and returned to l-f-l growth of 3.3% in H2 after a decline of 3.4% in H1. In total, UK l-f-l revenue declined 0.2% for the full year, benefiting from Norcros’s breadth of distribution channels, strong stock management and high service levels which drove market share gains. South Africa reported FY l-f-l growth of 3.9%, which was affected by ‘load shedding’, particularly in H2, which reported a decline of 2.2% after l-f-l growth of 10% in H1. After a review of the loss-making Norcros Adhesives business, the group has decided to close the operation. It lost c £3m on c £13m of revenue, which will be included in the full year trading numbers. However, it is expected that the c £5m cost of closure will be treated as an exceptional at the preliminary results.

Valuation: 252p/share implies c 40% upside

Norcros is trading at the low end of its long-term forward P/E range on 4.7x, suggesting that a lot of bad news is priced in. In fact, the stock has only traded materially below the current rating for a brief period in early 2020 during the COVID-19 pandemic, and again recently. We maintain our existing forecasts and retain our 252p/share valuation based on the average of our P/E-based model of 253p and our dividend discount model, which implies a value of 250p/share. Our valuation implies c 40% upside.

Exhibit 1: Financial summary

£'m

2020

2021

2022

2023e

2024e

2025e

31-March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

342.0

324.2

396.3

448.9

462.6

468.8

EBITDA

 

 

39.1

39.2

47.0

53.6

52.4

53.9

Normalised operating profit

 

 

32.3

33.8

41.8

47.7

46.2

46.8

Share-based payments

0.0

0.0

0.0

0.0

0.0

0.0

Operating profit - Underlying

32.3

33.8

41.8

47.7

46.2

46.8

IAS 19R Pension scheme expenses

(1.5)

(1.4)

(1.7)

(1.7)

(1.7)

(1.7)

Exceptionals

0.0

0.0

0.0

0.0

0.0

0.0

Impairment and acquisition related costs

(4.0)

(3.7)

(4.8)

(8.9)

(8.2)

(8.2)

Other

(9.0)

(3.8)

0.9

0.0

0.0

0.0

Reported operating profit

17.8

24.9

36.2

37.1

36.3

36.9

Net Interest

(2.8)

(6.4)

(3.2)

(5.9)

(7.3)

(6.3)

Profit Before Tax (norm)

 

 

29.5

27.4

38.6

41.8

38.9

40.5

PBT - Underlying

 

 

28.8

30.6

39.3

42.6

39.7

41.3

Profit Before Tax (reported)

 

 

15.0

18.5

33.0

31.2

29.0

30.6

Reported tax

(4.1)

(3.5)

(7.3)

(8.7)

(9.0)

(9.5)

Profit After Tax (norm)

25.4

23.9

31.3

33.0

29.9

31.0

Profit After Tax (Underlying)

22.8

25.1

31.5

33.8

30.7

31.8

Profit After Tax (reported)

10.9

15.0

25.2

22.4

20.0

21.1

Net income (normalised)

25.4

23.9

31.3

33.0

29.9

31.0

Net income (Underlying)

22.8

25.1

31.5

33.8

30.7

31.8

Net income (reported)

10.9

15.0

25.2

22.4

20.0

21.1

Basic average number of shares outstanding (m)

80

81

81

88

89

89

EPS - basic normalised (p)

 

 

31.63

29.65

38.70

37.53

33.67

34.90

EPS - diluted normalised (p)

 

 

31.37

29.58

37.99

35.86

32.89

34.09

EPS - Diluted, underlying

 

 

28.16

31.06

38.23

36.73

33.77

34.97

EPS - basic reported (p)

 

 

13.57

18.61

31.15

25.49

22.53

23.76

Dividend (p)

3.10

8.20

10.00

10.00

9.25

9.50

Revenue growth (%)

3.3

(-5.2)

22.2

13.3

3.1

0.0

EBITDA Margin (%)

11.4

12.1

11.9

11.9

11.3

11.5

Normalised Operating Margin

9.4

10.4

10.5

10.6

10.0

10.0

BALANCE SHEET

Fixed Assets

 

 

150.8

141.2

158.8

226.7

209.6

204.2

Intangible Assets

96.5

93.6

90.3

83.3

75.7

68.1

Tangible Assets

29.0

28.0

29.0

111.5

114.3

116.5

Investments & other

25.3

19.6

39.5

31.9

19.6

19.6

Current Assets

 

 

188.7

171.0

200.7

231.0

241.8

244.7

Stocks

78.9

78.1

100.6

116.7

124.9

126.6

Debtors

60.5

64.6

71.1

85.3

87.9

89.1

Cash & cash equivalents

47.3

28.3

27.4

27.4

27.4

27.4

Other

2.0

0.0

1.6

1.6

1.6

1.6

Current Liabilities

 

 

(79.2)

(104.1)

(110.8)

(125.1)

(123.0)

(124.6)

Creditors

(72.9)

(95.4)

(102.4)

(116.7)

(120.3)

(121.9)

Tax and social security

(1.0)

(1.0)

(2.7)

(2.7)

(2.7)

(2.7)

Short term borrowings

(0.1)

0.0

0.0

0.0

0.0

0.0

Other

(5.2)

(7.7)

(5.7)

(5.7)

0.0

0.0

Long Term Liabilities

 

 

(155.9)

(59.7)

(48.4)

(100.0)

(87.2)

(64.4)

Long term borrowings

(83.6)

(17.8)

(18.8)

(78.8)

(69.4)

(51.8)

Other long term liabilities

(72.3)

(41.9)

(29.6)

(21.2)

(17.8)

(12.6)

Shareholders' equity

 

 

104.4

148.4

200.3

232.6

241.2

259.9

CASH FLOW

Op Cash Flow before WC and tax

39.1

39.2

47.0

53.6

52.4

53.9

Working capital

(4.8)

21.8

(23.6)

(16.0)

(7.2)

(1.2)

Exceptional & other

0.0

0.0

0.0

0.0

0.0

0.0

Tax

(5.3)

(3.5)

(6.5)

(8.7)

(9.0)

(9.5)

Other

0.4

(2.0)

(0.9)

(2.9)

(0.9)

(0.9)

Net operating cash flow

 

 

29.4

55.5

16.0

25.9

35.2

42.3

Capex

(4.8)

(2.8)

(5.4)

(8.0)

(8.5)

(9.0)

Acquisitions/disposals

(9.2)

0.0

0.0

(80.0)

0.0

0.0

Net interest

(3.5)

(3.2)

(2.5)

(3.4)

(4.8)

(3.8)

Equity financing

(0.9)

0.0

0.0

0.0

0.0

0.0

Dividends

(7.0)

0.0

(9.1)

(8.3)

(8.8)

(8.2)

Other

(3.8)

(3.2)

(2.5)

13.7

(3.7)

(3.7)

Net Cash Flow

0.2

46.3

(3.5)

(60.0)

9.4

17.6

Opening net debt/(cash)

 

 

35.0

36.4

(10.5)

(8.6)

51.4

42.0

FX

(1.6)

0.6

1.6

0.0

0.0

0.0

Closing net debt/(cash)

 

 

36.4

(10.5)

(8.6)

51.4

42.0

24.4

Source: Company data and Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Norcros and prepared and issued by Edison, in consideration of a fee payable by Norcros. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Norcros and prepared and issued by Edison, in consideration of a fee payable by Norcros. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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